China’s steel profits suffer as production soars

20 November, 2019 12:00 AM printer

Beijing: China’s steelmakers have been slow to heed warning signs from the country’s economy as they push ahead with more production, raising the risk of a manufacturing slump.

While China’s quarterly economic growth has dropped to 6 percent, its lowest level in at least 27 years, China’s mills boosted crude steel production by double-digit rates in four of the past eight months recorded through October, raising output by 7.4 percent so far this year, report agencies.

The increases have been good for steelmakers’ revenues, but not so much for the bottom line.

On Oct. 28, the Ministry of Industry and Information Technology said that iron and steel revenue of 5.6 trillion yuan (U.S. $796 billion) rose 8.9 percent in the first eight months of 2019.

But on Nov. 3, the China Iron and Steel Industry Association (CISA) announced that combined profits of 146.6 billion yuan (U.S. $20.9 billion) in the first three quarters plunged 32 percent from a year earlier, the official Xinhua news agency said.

Steel manufacturing costs increased 8 to 10 percent, largely due to higher iron ore prices, according to CISA, while steel product exports fell 5 percent.

Despite the downsides, producers continued to crank out steel at or near record rates above 80 million metric tons per month. Production belatedly showed the first sign of weakening with a 2.2-percent year-to-year gain in September, followed by a drop of 0.6 percent in October as year-to-date totals reached 829.2 million tons, according to data reported by Reuters.

On Monday, Reuters reported that the government has launched an interagency investigation into steelmakers’ claims that they have cut manufacturing overcapacity while continuing to raise output, raising suspicions of falsification.

The pace of steel output has remained high despite seasonal controls to reduce smog in northern cities and a five-year campaign to shed overcapacity. Last month, the government eased its wintertime curbs on production with exemptions for more efficient mills, S&P Global Platts news service said.

China’s high levels of steel production suggest that infrastructure investment is still an indispensable element of economic policy, although the government insists it is not relying on massive stimulus spending, like the wasteful 4-trillion yuan program (U.S. $570.6 billion) that it used to stave off recession in 2008-2009.